How to Invest in Real Estate with Little (or no) Money - Real Estate Investing .org (2024)

The three most common ways people invest in real estate are through homeownership, REITs and ETFs, and direct investment.

How to Invest in Real Estate

There are a ton of different ways to invest in real estate. In fact, I generally say that it’s possible to be successful in ANY niche in real estate.

…Just not all of them.

So, figure out how you want to invest, then focus on that. Don’t try to do everything or you’ll find yourself not doing well at any of them.

Invest in Real Estate With Home Ownership

The true costs of owning a home are often forgotten until after closing on the property. Owners should remember they need to spend anywhere from 1-2% of the value of the property on maintenance and upkeep.

Home ownership definitely has much lower returns than the stock market, in fact, returns are near 0% once inflation and maintenance are taken into consideration.

But there is one way to turn your home into an investment, and it’s called doing a “live in flip” or also “house hacking.”

House Hacking

You start by buying a home that is a bit run down, but it’s in a nice neighborhood. The goal is to do improvements over the next 2-3 years then you can step up to something nicer, or do it again.

Once you’re done with the work and ready to go, you can either sell it and pocket the profits (usually for no tax, as your personal residence is generally not taxed). You can also keep it and use it as a rental property if you’d like.

I started in real estate with the stepping stone approach. My first property was a 3-unit multifamily near my grad school. We rented two units and lived in one for free.

After a couple of years, we moved to a townhouse and rented out all three units. Then, a few years later, we moved out of the townhouse and into something nicer.

Each time we moved, the rent on the previous unit paid most of the cost of the new one. So, we were never coming out of pocket very much to make the transition.

There are a lot of different strategies to use your home to invest, here is another.

Airbnb and Short Term Rentals

Another way to turn your house into a cash machine is to rent out individual rooms. This is an especially useful option for younger people or families without children.

Buy a house with more bedrooms than you really need. You can even convert an attic or basem*nt into a bedroom.

Then, get some roommates and rent out each room. Their rent will most likely cover all of your mortgage and utilities.

Another option is to use Airbnb. If you’re in a good area that people need to visit, you can earn a lot more per month than having a normal roommate.

Crowdfunding Real Estate

This is relatively new, but it’s becoming bigger and bigger every year.

Basically, you are investing a small amount of money into a larger deal and sharing in the risks and the rewards.

While people have been doing this for a hundred years in a more private way, it is very new to the internet.

The benefit is thebest crowdfunding platformsdo a lot of due diligence for you and that helps weed out the bad deals. Some of the platforms are limited to accredited investors, but others accept both accredited and non-accredited investors.

In case you are wondering, an accredited investor is someone who earned $200,000 ($300k if married) and has a reasonable expectation to continue earning that. Also, a net worth of $1m or more (excluding your primary residence) also qualifies you.

My favorite sites are Fundrise and EquityMultiple, both of which are unique and well established.

A couple sites let you invest in some deals for as little as $1,000 which is awesome. Most sites require $5,000 – $10,000 which is still good. A few require $20,000 or more which is more in line with what a standard syndication requires.

REITs and ETFs

A REIT, orreal estate investment trustincludes a huge array of offerings and can include investments in every niche in real estate. The requirement to be a REIT is it must distribute 90% of its earnings to shareholders.

It also has to pass a number of other tests in order to maintain its status as a REIT.

With exchange-traded REITs, you can theoretically buy just 1 share. but there are also private REITs with massive minimum payments which is why the minimum investment has a question mark next to it.

The great thing about a REIT is you can easily get some exposure to real estate in your portfolio. Simply buy into it withyour brokerage accountjust like you would with any other stock or bond.

You’ll find that you could earn better returns if you invested directly into real estate yourself, but there is a tradeoff between time/convenience as well as the effort required.

Though you technically may own a portion of the real estate, you have absolutely no say in how it operates. You can’t decide on what real estate you buy or how it’s managed. You can only vote with your feet and sell your shares and move on.

There are 3 types of REITs – Private REITs, public exchange-traded REITs, and public non-traded REITs.

Directly Invest in Real Estate

People are afraid of this because they don’t want to “fix leaky toilets” or any number of other excuses.

Who wants to fix toilets? I don’t even think plumbers like to fix them.

The reality is direct investments can be as active or passive as you want them to be. You can actively manage your property, or go a more passive route.

So, you can fix toilets if you are hands-on, or you can just hire other people to do it.

The greatest benefit to directly investing in real estate is that you can leverage your returns.Also, you can find way better deals to invest directly in than in any other form of investing.

1. Repurpose your primary residence.

If you already own ahome, you’re ahead of the game. If you don’t,buying one is a great way to get started in real estate investing. Look for amortgage with little to no down payment, such as a VA, USDA, or FHA loan.Credit score and down payment requirements are usually a little more stringentfor investment properties so, if this is your first home and you are planningto use it as your residence, you’re likely to get approved if youhave decent credit.

That said, if you’rebuying a home using one of these types of loans, you have to follow thestipulations of the loan agreement. These are generally not considered loansfor investment opportunities, they’re for people purchasing a homefor themselves.; Usually, there are requirements for how long you have to usethe property as a primary residence. So, you may need to live in the home for ayear before you’re allowed to rent it out or sell it.

One way that a lot ofpeople get into real estate investing is by upgrading to a bigger home andholding onto their starter home to use as a rental property. There are manyperks to doing this. First, you’re already familiar with theneighborhood since you lived there yourself. You know the type of tenants youcan attract and what fair rent is for the area.

Second, you knoweverything about the house, including how old the furnace is, when the roof waslast repaired, and whether or not the water heater will need replacing in thenext year or two. Chances are you purchased the appliances yourself and youlikely already know how to fix any minor problems a tenant might have. Rentingout a property that you know intimately eliminates a bit of the learning curveand is a great way to get started.

2. Consider a duplex or triplex.

Whether you’rebuying your first home or thinking about moving, buying a duplex is anothersmart and easy way to get into real estate investing. Down payments varydepending on the loan you qualify for but they’re usually onpar with a single-family home as long as you plan to occupy one of theresidences.

This arrangement hassome of the same benefits as renting out a single-family home you used tooccupy. If the duplex is in an area where you know you want to live, you’reprobably already familiar with the neighborhood, schools, amenities, andanything else potential tenants would want to know. Also, since you bought thehome and presumably spent some time looking at other properties in the area,you should have a good idea of how much you can expect to ask for rent.

If you manage thisarrangement in the right way, the rent you collect from the tenant ends uppaying a majority of your monthly mortgage payment. This is great because itmeans you can either cut back on your full-time job or save the extra incomeand build up more savings to invest in your next property.

3. Find a seller willing to pay closing costs.

There is a long list ofclosing costs to be paid before a home sale is complete. These include but arenot limited to application fees, appraisals, home inspection, mortgageinsurance, origination fees, pest inspections, and underwriting fees.

To lower the amount ofmoney you need upfront when buying a piece of real estate, ask the seller topay the closing costs. While not all sellers are willing to do this, some willbe. This is often used as a way to incentivize the sale so it’san especially useful negotiating tool if the seller is having a hard timegetting rid of the property.

The downside to this isthat you are often unable to negotiate on the asking price. This means that,while you don’t have to have as much money to put downat the time of the initial transaction, the overall loan is larger with thepayments spread out over the life of the mortgage.

Is it worth it? Thatdepends. Since you’re buying this as an investmentproperty, it’s essential to make sure that any monthlyrent you get from tenants living in the property is enough to cover themortgage payment, ideally with a little bit to spare. If you can cover allcosts with rental income, it’s a great way to get started inreal estate investing.

4. Use a lender that is willing to work with you on closing costs.

Again, finding a way to work around having to pay upfront closing costs is an effective way to invest in real estate while saving thousands of dollars. If you can, find a lender that is willing to pay closing costs or work them into your down payment.

One thing to note aboutthis option is that you probably won’t qualify unless you have a creditscore of around 700 and a low debt-to-income ratio. Lenders need to see thatyou have a record of paying your bills on time even though you don’thave enough cash to cover closing costs at the time of the sale.

5. Dip into your home equity.

If you’re lucky enough to already own a home, taking out a home equity line of credit or loan is a great way to get a large chunk of money for investing in real estate. Depending on the lender, you can access between 70 to 80 percent of your home’s current equity.

Let’ssay you paid $200,000 for your home and currently owe $150,000 on yourmortgage. Your home equity is $50,000 which means you may be eligible to borrowbetween $35,000 and $40,000. If you’ve managed to pay off half of yourmortgage, your equity in the home would be $100,000 and you may be able toborrow between $70,000 and $80,000.

As you can see, this isa great way to get your hands on a nice amount of money to invest in a rentalproperty. That said, this is something you really need to think about,particularly if you share your home with someone else as they should have someinput into a decision like this.

A home equity line ofcredit is not free money – you have to pay it back in addition to continuingyour regular monthly mortgage payments and any mortgage payments on the newreal estate. You should think of it as a second mortgage on your home. Theinterest rates on home equity lines of credit are usually a little higher thanthe prime rate but they’re much easier to get and don’trequire closing costs or any type of cash upfront.

Presumably, you took out the home equity line of credit to buy a rental property. So, when figuring out what to charge tenants for rent, remember to factor in the new mortgage payment as well as any repayments on your new line of credit. Depending on how much you borrow, this could be easily manageable or a bit of stretch. If you get a good deal on a nice property or put a little of the money into fixing it up, you can likely get enough from rental income to cover the monthly expenses for the new mortgage and the home equity loan.

Final Thoughts

You can choose exactly what you want to invest in and what you don’t want to invest in.

Lastly, you can decide which properties to invest in and which ones to skip. You can also decide how to deal with problems or let someone else figure it out. You have a high degree of control.

The key to this is to first, determine your niche in real estate.

Then, it’s time to make offers and buy some property!